The Real Impact Of Foreign Investors On Our Housing Market

There’s recently been a great deal of news and even hysteria about foreign investors pushing up our housing prices so today I’d like to sort out the truth from the trivia

There’s no question that Australian housing has always been attractive to foreign investors due to its high returns and lack of price volatility, but the regulations managed by the Foreign Investment Review Board (FIRB) ensure that foreign purchasers can only buy new or off the plan properties.

This limitation is designed to ease the housing shortage squeeze while reducing competition for existing homes.

Last financial year’s biggest spenders were Chinese and Canadian buyers who purchased around $11 billion worth of residential property, making up a huge slice of the $17 billion total.

Chinese investment grew by over 40% but what effect is this huge investment having on Australian housing prices?

Let’s look at some critical facts.

Firstly, the issue is not about the volume, as the value of all foreign purchases was less than 6% of the total value of residential property sales in 2012/13.

Secondly it’s not about the trend either, as the total value of overseas purchases actually dropped by 15% or $3 billion last financial year compared to the year before with big falls from Malaysia, Singapore, the UK and USA.

To understand the impact of foreign investment on Aussie property prices we need to understand how this market operates.

The FIRB regulations restrict foreign purchases to new dwellings but there is no restriction on the percentage of foreign ownership in new unit developments, as long as the properties are promoted to local buyers as well as off shore.

This encourages developers to promote and sell large scale inner urban high density units off the plan to potential overseas buyers through local media advertising, seminars and agents.

These are sold on the basis of potential investor demand rather than actual renter demand and have rental guarantees in place ensuring investor security for several years regardless of the actual trends in rental demand that may transpire.

Even as the housing shortage worsens in most capital city locations, the opposite occurs where these projects are concentrated. It can take up to two years for off the plan developments to be completed and the scenario is set for massive hidden oversupplies to build up while more are approved and sold off the plan to investors.

This sequence of events unfolded in the Gold Coast high rise unit market following the GFC and more recently the inner Melbourne unit market as the rental guarantees finally expired andhundreds of rental vacancies occurred at the same time in the same locations, resulting in savage asking rent falls.

This was accompanied by more rental stock pouring onto the market as units sold off the plan years before were completed and advertised for rent. Desperate overseas investors tried to sell their vacant investment properties and prices started to tumble.

In fact, it could be argued that the historically low unit prices on the Gold Coast and falling prices in Melbourne’s inner unit market are a direct result of too many overseas investors and not enough renters.

No one is to blame for this situation – developers naturally market to the expected demand from buyers, many of whom are overseas investors who have no idea of the expected demand for tenants.

As always, in localities where most properties are investor owned, the ultimate cause of price changes is the relationship of rental demand to supply.

This often leads to much higher price and rent volatility in inner urban high rise unit markets than in other areas of our housing market and it’s the reason that the value of property purchases made by investors from Malaysia, Singapore, the UK and USA fell by half last financial year.

Source: FIRB Annual Report 2012-2013

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After recently buying some land as joint tenants with my non-citizen / non-resident wife, I’m confident that the processes of identity confirmation required for the Settlement Agent to complete the purchase (in WA at least) provides a high level of control.
It was actually the developer who raised the issue in the first instance and referred us to the FIRB (who’s website was very informative and clear).
I can’t comment on how this would work with business entities, but I would assume it’s even more stringent.

John,
The second paragraph of your article contains a fundamental flaw when you state that the FIRB regulations “ensure” that foreigners can only buy new or off the plan properties. How? Your argument is based on 2 false assumptions: 1. That foreign buyers go to the FIRB in the first place (clearly many don’t and indeed also buy established properties); and 2. that the FIRB regulations are enforced (how and by whom?) Also, ask yourself a simple question and see how comfortable and confident you are in your answer-who actually checks the bona fides of a foreign buyer or anyone for that matter who buys through a company or some other entity? A commission-driven estate agent, vendor, conveyancer, anyone else? Personally, I doubt it very much.
Regards

Thanks for your response – you raise an interesting point, because yes, I am assuming that the FIRB regulations are enforced. If they aren’t, then we could be selling off the farm so to speak without even realising it. Perhaps you could address this question to the FIRB and see what they say – I would certainly be interested in their answer!

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